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Looking Ahead to the Connect America Fund Phase II Auction

Submitted on May 1, 2017

What needs to happen to have successful universal service auctions?

Under the new Trump Administration, the Federal Communications Commission (FCC) moved quickly to take concrete steps to advance parts of Chairman Pai’s digital empowerment agenda to advance broadband across America. In February, the FCC voted to adopt rules for the upcoming Mobility Fund Phase II auction and the Connect America Fund Phase II auction. More recently, the Chairman established a Task Force to oversee the two auctions, signaling that these auctions are a priority for the agency. That’s progress – but the real question is – what needs to happen next to have successful auctions for these universal service subsidies?

The Connect America Phase II auction will focus on two discrete areas of the country – 1) areas where the incumbent telephone company declined an earlier offer of universal service subsidies, and 2) areas that are deemed extremely costly to serve, based on a FCC-developed cost model. The nearly $200 million in annual funding over a ten-year term – almost $2 billion overall – is far below the amount calculated by the model to serve these areas using fiber technology, but support levels could be significantly lower to the extent winning bidders can leverage existing assets or deploy alternative technologies.

In the Connect America Phase II proceeding, the FCC and representatives of potentially-interested bidders – including incumbent providers, small cable operators, fixed wireless internet service providers, electric utilities, satellite companies, and others – have spent considerable time and energy arguing over the intricate details of how bids from providers offering different levels of fixed-broadband service should be compared to one another to determine the winning bidder. Additional procedures for the auction remain to be decided, including the mechanics of the intended multi-round auction, package bidding, and specific reserve prices for particular areas. These details are important, but, at the end of the day, to have a successful auction requires more than a good set of rules adopted by regulators. The answer lies not just with the FCC, but also with pro-active state and local action.

The policy outcome we are trying to achieve is broadband coverage across America. While auctions, by design, are intended to allocate scarce resources in an economically-efficient manner, some are concerned that wide swaths of the country will be left unserved after the Connect America Phase II auction. The success or failure of this auction will be judged in large part on the perception – right or wrong – that all parts of the nation will receive some fair share of the auction proceeds.

Everyone has a role to play in making universal service a reality.

As we approach this auction, it is important to remember why we are auctioning these areas in the first place. These are areas that the private market has been unwilling to serve to date, and therefore it is reasonable to assume that the business case to offer broadband to residential consumers is not sufficiently profitable. Some form of financial subsidy, ideally coupled with other measures that lower barriers to deployment, is necessary to induce companies to serve these markets. Realistically, given the significant fixed costs of deploying broadband networks, the likely bidders are firms that already commercially provide broadband service somewhere and want to expand their footprint. It simply is not reasonable to expect widespread entry by new firms with neither assets nor experience as a service provider, and the FCC’s rules are wisely designed to ensure that recipients of support have some track record in the business of providing critical infrastructure. Consumers are the ones that lose if a start-up with no experience in operating a network or serving customers has an unrealistic business plan and finds itself unable to perform.

Neither the FCC nor the potentially-interested bidders possess a crystal ball to foretell how the Connect America Phase II auction will play out in the real world. But we should recognize that the extent to which money flows to one state or another will depend on whether there are any firms willing to serve rural markets in a particular state in the first place. The reality is that some areas of the country may not have bidders at all – and absent bidders in the Connect America Phase II auction or subsequent Remote Areas Fund auction, there will be no provider of broadband in such areas.

So what concrete steps should be taken now to pursue a successful outcome so that all areas benefit? It’s critically important to mobilize boots on the ground to pursue federal funding where available. More can be done at the state and local level to educate interested stakeholders in these rural communities about the upcoming Connect America Phase II auction. Now is the time for the officials across the country – local communities, counties, regional organizations, and state agencies – to identify who potential bidders might be and to do everything in their power to create an environment that is conducive for those bidders to enter the market. State governments in particular – whether through their economic development department, a special task force established by the Governor’s Office, or elsewhere – can play an important coordinating role to identify potential bidders for their state, making sure that all parties are fully informed, and creating incentives where necessary to get companies that could serve these areas to step up to the plate. Localities should focus on what they can do to expedite local permitting and other necessary approvals, and adopt streamlined policies before the auction occurs. And communities can play an important role in identifying demand for services, and making that known to potential service providers.

Like any thorny problem, addressing the broadband deployment gap requires more than a one-size-fits-all solution. Some states are providing direct funding to tackle this problem, including New York, Minnesota, Wisconsin, and California. Those efforts are laudable, and officials in other states should develop their own strategies to help solve the problem. If a state does nothing to prepare for the Connect America Phase II auction, it shouldn’t be surprised if it turns out there are few winning bidders in the state. And state and local officials shouldn’t blame the federal government if that occurs. Everyone has a role to play in making universal service a reality.

Carol Mattey is the former Deputy Bureau Chief of the FCC's Wireline Competition Bureau (2010-2017) and Senior Advisor on the National Broadband Plan (2009-2010), where she led teams working on the landmark Connect America Fund and other initiatives to modernize the FCC’s universal service programs. She currently is the principal of Mattey Consulting LLC, which provides strategic and public policy advisory services to broadband providers, governmental agencies, non-profit organizations, and other entities active in the telecommunications arena.